Paul Grignon's 47-minute animated presentation of “Money as Debt” tells in very simple and effective, graphic terms what money is and how it is being created. Thanks to a reader for bringing it to my attention. Presentations that give us an historical perspective on how we got to where we are today are useful.
Follow
____________________________
Cory’s Chart Corner
;
1. Banks are lending out money they do not have and charging interest on it? Is it me or is this simply outrageous?
2. The interest charged on money lent out is growing faster than money being produced in the system. This is a no win scenario and such a system will surely fail at some point. Could it be we are witnessing the beginnings of that collapse now?
Thanks for posting the video Danielle. Very eye opening.
The current failure of the free market (including the banking system) is simply that people were lent money they could not repay (equivalent to somebody turning off the music in the game of “musical chairs”).
The alternative is to fix the problem and not to turn to socialism and communism, which such is the true “slavery”.
The fallacy of the clip is that people actually can pay off debt and experience the joy and happiness of actually producing something tangible that betters the lives of others as a result, i.e., invention of medicines that save lives, computers that educate, developments and mechanisms that enrich; this is the product of credit and credit is the blood of the free markets that bring about such.
Life is more than one the single dimension of banking as a means of dispersing the trade of ideas and labour and the potential reward for such; but includes real property along with real lives, real hopes and real dreams that do come true with hard work and a “bank loan”, that I can pay off.. and then begin to earn some interest, too.
Rick McElroy
The Money As Debt theory is fallacious.
According to the Money As Debt theory, commercial banks create money whenever they loan out money. But this is very misleading, because this so-called created money does not increase the amount of money buyers are able and willing to spend! Here is why.
Let’s say Ms. A has a job that provides her with a net income of $2,500 a month, all of which she is able and willing to spend on goods and services. This means that over the next year she will have $30,000 to spend on purchases. She decides to buy a car for $12,000 for which she is willing to pay $1,000 a month for 12 months. So she goes into a bank to borrow $12,000 to buy a car from Co. B. The bank approves the loan and makes out a check for $12,000 payable to Co. B.
Let’s stop here for a moment and ask where does the bank get the $12,000 to enable it to write the check. The answer is that it doesn’t! The bank has the legal authority to just write the check with little or nothing to back it. Thus the “illusion” of creating money. To see why this is only an illusion of money creation, let’s go back to the story.
Ms. A takes the check and gives it to Co. B in exchange for the car. Co. B deposits the check into its checking account. This increases Co. B’s ability to purchase goods and services. HOWEVER, Ms. A’s ability to purchase goods and services has just gone down!!! She is no longer able to spend $2,500 a month because she must now give the bank $1,000 a month to repay the principle on her loan, which leaves her with just $1,500 a month (or $18,000 over the next year) to buy additional goods and services.
The net results are the same whether Ms. A takes out a loan for the car or pays cash for the car. In both scenarios, Ms. A ends up with the car and has only $18,000 left to buy additional goods and services, and Co. B has the $12,000 to spend on goods and services. Therefore, the amount of money society in total (Ms. A + Co. B) is able and willing to spend on goods and services is exactly the same whether Ms. A borrows the money or pays cash for the car!
In other words, when a bank makes a loan, it is only creating money according to the Fed’s definition of the money supply (M1, M2, or M3). It is not creating money in the sense of increasing the amount of money society is able and willing to spend on goods and services.
This means that the money “created” by banks writing loans is non-inflationary, because it doesn’t increase society’s ability and willingness to spend.
If the bank had just given Ms. A the $12,000 to buy the car without any obligation to repay the loan, then that would be true inflationary money creation. Now we can see why governments choose to borrow money instead of just printing it. Borrowing is non-inflationary, but printing is inflationary.
But let’s not forget about the interest. The video makes a big deal about the interest. It says that banks don’t create the money to pay the interest, it only creates the money to pay the principle. It says the money to pay the interest doesn’t exist. Therefore the only way to get the money to pay the interest (on a society basis, not an individual basis) is to take out more loans, which in turn will require more interest to be paid, which requires more loans, etc., etc. To sustain this, the video claims, requires exponential growth in trade.
But the video’s claims about interest are totally inaccurate. A payment for interest is a payment for a service. And the economic effect of a payment for servicing a loan (interest) is no different than payment for any other kind of service, such as for a haircut or a taxi ride.
When a bank receives an interest payment it is no different than income by any other company or individual. Bank people are just like other people, they too need to buy homes, cars, TV sets, groceries, etc. Therefore, the money just gets circulated back through the economy over and over again. No exponential growth is required to pay the interest.
The video also claims that with a stable money supply, the banks, because they are charging interest, will end up with all of the money. But this is only true if the banks never spend the interest (income) payments they receive. But the same can be said for any service industry. If they never spend their income, but could keep selling their services, they too would, eventually, end up with all the money.
We now have enough to conclude that the Money As Debt theory is false.
Arkadeas with all due respect your quite wrong, The main point is you cannot make money from money (as is the case with interest) payment for a hair cut is just that,it is payment for a persons time something which is intangable and can never be given back. It is physically, financially, mathematically (whatever you want to call it) imposible to give back more than has been given out, what banks are asking you to do when they ask for interest on a loan is steal money from the pool of money containing only the principle amounts.
Try it with matches, with monopoly money, with milk bottles, with a spreadsheet, whatever you like! its impossible.
Mr S
excuse me?
Does anyone else here know anything about the Federal Reserve System? Ever hear of “Reserve Requirements”
The government requires that members of the Federal Reserve maintain a certain amount of “Reserve”, described in short hand as bank capital, bank retained earnings, and demand deposits. (for those curious…demand deposits are checking accounts.) Certs of deposit are not considered reserves.
If the Reserve Requirement is 20%, (again using short hand) The member of the Federal Reserve with $1,000,000 in loans will have to maintain $200,000 in Reserves. Or, if a bank has $200,000 in excess allowed Reserves, they can lend $1,000,000.
Ergo, $800,000 new money in the system. Those loaned monies are deposited into a demand account somewhere, and the game goes on!
The issue is keeping track of all of this. M1, M2, M3, etc.
But of course the truth is much larger… but this brief description conveys the basic idea.
It is called Fractional Lending.
BillH